Horizontal versus vertical rigs
According to oil service company Baker Hughes (BHI), the horizontal rig count was down by four rigs in the week ended July 17, 2015, compared to the previous week’s count. Last week, the horizontal rig count went back to its declining trend after a break a couple of weeks ago. In the 12 months ended July 17, the number of horizontal rigs in operation fell by 638, or 50%. Currently, there are 650 active horizontal rigs, 722 fewer than the record high of 1,372 on November 21, 2014. This represents a fall of 53%. Horizontal rig counts repeatedly set and broke new records throughout 2014.
The number of vertical rigs in operation rose by two to reach 123 last week. In the 12 months ended July 17, the number of vertical rigs fell by 243, or 66%. Directional rig counts decreased by four rigs in the week ended July 17.
Horizontal rigs and the shale boom
At the end of June 2015, the horizontal rig count was still up by ~98% compared to the count in January 2007. During this period, the number of active vertical rigs fell by ~90%. The rise in the number of horizontal rigs occurred in tandem with the US shale boom. Companies tap unconventional (shale) oil and gas reserves using a combination of horizontal drilling and hydrofracking. Vertical wells are typically used in conventional production.
How are energy companies affected?
Upstream energy companies like Whiting Petroleum (WLL), ExxonMobil (XOM), Royal Dutch Shell (RDS.A), Marathon Oil (MRO), Pioneer Natural Resources (PXD), and Carrizo Oil & Gas (CRZO) operate in unconventional resource shales. They use horizontal drilling extensively. A fall in the number of active horizontal rigs shows that these companies are shying away from the horizontal drilling operations that drove the US shale boom. Whiting Petroleum accounts for 1.37% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and 0.36% of the Vanguard Energy ETF (VDE).
The shale boom also helped midstream MLPs like Magellan Midstream Partners (MMP), Crestwood Midstream Partners (CMLP), Buckeye Partners (BPL), and EQT Midstream Partners (EQM) boost their revenues over the last seven years.